Sunday, June 13, 2010

The woes of BP’s oil spill are still making headlines these days. After several unsuccessful attempts at capping the oil spill, British Petroleum (BP) is still unable to stop the oil from flowing in the water. With liabilities expected to reach several billion dollars, investors have been selling off BP’s stock, which has caused it to decline almost 50% from its highs in April. The uncertainties regarding BP's future liabilities, have caused the Obama administration to push for a dividend cut, in order to ensure that the company would have the cash to pay its obligations.

Right now British Petroleum (BP) is generating profits in excess of $6 billion/quarter, paying out $2.6 billion in dividends and reinvests the rest in the business. The oil spill so far costs approximately $1.5 billion so far, but the overall liability could exceed tens of billions of dollars. The biggest risk is not that the environmental cleanup will be very expensive, but whether BP would be required to pay punitive damages for compensation to thousands of small business owners in the Gulf affected by the oil spill. BP had approximately $12.20 billion in cash and short-term investments at the end of Q1 2010, which should be sufficient liquidity provided that punitive damages are not imposed. Without the push from the US government, the oil spill would not have cost too much. However, given the pressure from the Obama administration, the total cost of the cleanup could definitely balloon and become excessive enough to even put the company in jeopardy.

Sometimes, despite the company’s ability to pay dividends, the strong hand of the US government could temporarily disallow its dividend payments. Back in 2009 this was the case for some of the strong banks such as State Street (STT), US Bancorp (USB) and Wells Fargo (WFC). Because the government imposed on to them to take TARP funds and asked them to conserve cash, these financially sound institutions had to drastically reduce distributions.While there are thousands of fishermen and business owners who would be negatively affected by the oil spill, there will be millions of retired investors worldwide whose lifestyle would be negatively affected by a potential dividend cut or suspension.

Times online reports that on Monday, BP’s board will hold a teleconference and will discuss compensation and whether to suspend dividend payments. Suspension or a cut in the dividend would affect millions of British and American investors. Only a few months ago, BP was Britain’s biggest company with its dividend payments accounting for almost 14% earned by UK pension funds. “BP is preparing to defer payment of its next dividend to shareholders by placing the money in an escrow account until the full scale of the company’s liabilities from the disaster can be determined, The Times has learnt. “(Times online)

If dividends are suspended, many investors would probably exit the company. I would also sell my position in BP should the dividend be cut or suspended. Since the oil spill has not been fully contained so far, the liabilities that BP faces could not be calculated. Because of this, chances are that dividend payments might remain suspended or cut even after a few years after the environmental disaster in the Gulf of Mexico.

British Petroleum could learn from the experience of Exxon Mobil (XOM), which was deemed by the US Supreme Court to be “worse than negligent but less than malicious” after the Exxon Valdez oil spill off Alaska in 1989. Exxon eventually paid only a fraction of the $5 billion fines originally imposed, and in 2008 it reported the highest single-year profit in American history.

7 comments:

Let me just say two things: First, I can only hope this company goes down the drain and that the investors (and hopefully also the government) hold the irresponsible and incompetent management accountable. Second, if you let your lifestyle depend on a company whose businessmodel's foundation is basically destruction of this planet, you shouldn't be too surprised about some negative side-effects.

The Exxon Valdez litigation was only recently concluded, even though that incident occurred over 20 years ago. Talk about "justice delayed is justice denied!" I hope that the U.S. government will learn from the Exxon travesty & will take aggressive steps against BP to ensure that innocent Gulf victims are made promptly whole for their damages, both economic & environmental. If that means forcing BP to suspend or reduce dividends or freezing BP's assets, so be it. That may be inconvenient for investors, but investors should not be the highest priority of our government & legal system. Artificial limits on BP's liablity, including limits on punitive damages, are unfair to the real, innocent victims & would encourage reckless behavior by exploiters like BP. Right now, our nation's economic well being demands that BP's assets & insurance proceeds be made available for prompt payment of the massive damages caused by BP.

You have stated that you will sell your position in BP if/when the dividend is cut or suspended. It is reasonable to assume that the stock price would be hammered if that comes to fruition, and people selling at that point might suffer a significant capital loss.

The source of the pressure on the dividend is an extraordinary event, as opposed to a general failure of the business itself or the economy. That is, assuming that BP isn't punished out of existence, its long term prospects of paying its dividend would seem, to me, to be ok.

The current spill, as it is yet ongoing, will be significantly worse than the Valdez spill. However, you correctly point out that Exxon not only survived (paying less than the actual damages levied) but thrived in the long run.

You also pointed out the very significant role BP plays in the UK economy. While I expect that BP's liabilities will be huge, I also expect the UK to protect BP from outright death (in whatever way it can, without looking like it is siding with a villain).

IMO, the probable risk is a suspension of the dividend, followed by a reinstatement as a reduced rate (something more in line with the other major oil companies). The question is, if we originally planned a long time frame on holding BP, would it hurt more to take the capital loss now, or to lose dividends for perhaps a year or three?

What a disappointment to see the short-sightedness of the public as politicians, lawyers and media are milking this story for their own benefit. BP is doing all it can to repair the mess in the midst of this lynch mob, having been made a convenient scapegoat for being a "foreign company". Little to nothing has been said on the role played by Transocean or US service companies such as Halliburton that were in charge of critical operations. Luckily BP isn't a bank that needs a bailout from taxpayers for the mess it created. Public cries to destroy the one entity best equipped to deal with the situation are therefore like shooting oneself in the foot. Ultimately, the consumer wants oil and that's why BP, along with others, are drilling for it in the Gulf. This comes with risks that the very same consumers are apparently unable to face when this close to home. Although the end responsibility lies with BP, a proper inquiry should reveal a more subtle outcome - whereby others involved (including regulators) carry some of the blame. This is why the litigation and criminal charges wont be the straightforward "guilty on all counts" verdict that politicians and media are prematurely circulating. As for suspending the dividend for a couple of quarters, it makes no difference at this stage. The uncertainty of what populist threat or action the government comes up with next to punish BP is what's killing the share price. All the rhetoric is doing nothing to restore the environment or lives of those affected. A sensible handling of this tragedy will prevail in the end, once the focus has shifted from vilifying one company to understanding and fixing all that went wrong. Meanwhile, I continue to add to my position at these bargain prices.

06/17/2010: In regards to the BP dividend cut. I agree BP should cut future dividends to ensure immediate liquidity for dealing with the spill. I venomently disagree, however, with the canceling of the 1st quarter dividend scheduled for payment June 21st, 2010. This dividend has already been declared. I submit that the declaration of dividend and subsequent announcement of payment date constitutes a legally binding contract between BP and the shareholders. It is my contention that at the time of dividend declaration the funds are set-aside in a kind of escrow account and the funds are then actually owned by the shareholders, not the company. The company’s books confirm this as the monies are handled as a liability from this point until the payment date when this legal liability is removed from the company’s books.

If this skullduggery is allowed to set a legal president, the stock market is surely broken. The market value of stocks with dividends is affected by the cycle of dividends. If an announcement of dividend and subsequent determination of shareholders of record and the setting of payment date are not legally binding, then we are to assume business in this country is conducted on a good faith wink and a nod and not rule of law. I submit that the flamboyant announcements made by our president and the CEO of BP yesterday, amounted to throwing stockholders under the bus. I contend the dividend scheduled for payment June 21st is not BP’s to give with or without the theatrical appearance of coercion by the U.S. government. It is my opinion that this entire charade was intended to take the spill clean up funds handily out of “small people’s” pockets, not BP’s. Is it coincidence that thos “meeting” was scheduled 2 1/2 business days before payment of dividend was to be made. I would be interested in hearing from others on the legal issues proposed here. I am not a lawyer and only have referenced the many legal blogs available on the web. If I am wrong, there are a whole lot of websites which need to change their legal definitions. The consensus of these references (including some legal dictionaries), will all, without exception, need to change their views, because they support my argument 100%.

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